Asleep at the wheel

The Thinker by Rodin

Based on reading news reports yesterday, it seems the SUV’s days may be numbered. Yesterday, General Motors announced plans to close four truck and SUV plants by 2010 as a result of shrinking sales for these vehicles. Ford Motor Company has also cut production of trucks and SUVs. Sales of large and midsize sports utility vehicles are down 30 percent compared with the May 2007. To try to get rid of them, Ford is offering substantial discounts. Good luck with that. With gas prices in my neighborhood now at $4.019 per gallon and with the summer driving season just starting, buying a SUV or any vehicle with low miles per gallon looks very stupid.

Despite their popularity, the SUV epitomizes America at its worst. SUVs were always expensive. Double the cost of gasoline and it is like adding an extra hundred dollars a month or more to your car payment. Unless your SUV is paid for, this either makes your SUV unaffordable or moves it into the luxury category. Moreover, the more you drive an SUV the more unaffordable it becomes. Even the automobile manufacturers’ attempt to put lipstick on a pig by making hybrid SUVs has not worked. GMC has sold only 1,100 of its Chevy Tahoe hybrids. That’s 1,100 total nationwide.

Unsurprisingly, fuel-efficient small cars are now hot. Fuel-efficient hybrid cars are even hotter. The Washington Post reports that owners of the Toyota Prius compete against each other to prove they are the more fuel-efficient driver. Also rising in popularity is mass transportation. Overall ridership was up 3% in the first quarter of the year compared with a year ago. In Baltimore, light rail usage is up 17 percent in a year. The Metrorail system here in Washington D.C. is running more and more eight-car trains, and most rush hour trains are still standing room only. While only 5% of Americans use mass transit regularly, you can bet many more wish it were an option and would use it if available. They have just unwisely chosen to live in an area that is not accessible to mass transit. More businesses and governments are allowing employees to work four 10-hour days so they can save on fuel costs.

General Motors seems to have figured out that gas prices will not return to nostalgic gas guzzling levels again. In one of the least surprising news stories of recent months, Rick Wagoner, the current GM chairman and chief executive said, “We at GM don’t think this is a spike or temporary shift; we believe that it is, by and large, permanent.” Which is why it is closing plants and laying off employees. GM has shrunk to half the size it was in its heyday and will now shrink even further. Thousands of American workers are among victims of their unenlightened leadership. Our friends in the North American Free Trade Agreement are also feeling GM’s pains. A plant in Canada and another in Mexico are among those that GM plans to close.

While GM’s sales plunged 28 percent and Ford’s dropped 16% compared to a year ago, some automakers are sitting pretty. Honda Motors, which has engineered fuel efficiency into its cars for more than two decades, reports its auto sales rose 18% in May. Both our cars are Hondas. I have been driving a fuel efficient 2004 Honda Civic Hybrid for three and a half years and routinely average 37 to 40 miles per gallon. We will likely add a third Honda to our family shortly. Our daughter needs a car for college, which begins in August. While we looked at used cars, we found we could purchase a fuel efficient Honda Fit for the same price as a used car that is three or four years old.

America’s love affair with the automobile is destined to downsize in the 21st century, but it will not go away entirely. Clearly, we are now in the transition phase where we have to live within our means in an increasingly expensive world. Unlike the oil shocks of the 1970s, this one is not going to go away. It may moderate from time to time. When even General Motors acknowledges the long-term trend is real, you know the gig is up.

American automobile manufacturers should have learned from the oil shocks of the 1970s. Instead, they chose complacency. Why reduce shareholder profits by making long-term investments in fuel-efficient vehicles? Instead, executives can get big bonuses for short-term profits. Inertia pays because America’s brand of capitalism rewards short-term profit makers. The formula works of course until market forces change the dynamic. Then stockholders get the shaft for their obsession with short term profits. Auto manufacturers like GM are caught flat-footed. This is a company that is so unenlightened that it killed its own experimental electric car, the EV1.

Honda Motors is laughing all the way to the bank. Americans will still need cars, but they will need reliable fuel-efficient cars. The company showed the long-term vision that positioned them well for any change in market dynamics, which will translate into greater market share and greater profits. GM and Ford were largely asleep at the wheel, belatedly reacting to market forces rather than positioning their companies to profit from them. As a result GM and Ford are shrinking.

GM plans to either radically change or sell its Hummer brand. Once the world’s largest automobile company, it now looks in real danger of going out of business. It may join a long list of failed automobile manufacturers.

If I were a GM stockholder, I would be working to fire its whole management team. It needs new leadership with a clue on how to anticipate market dynamics. This way stockholders always win. It needs a consistent long-term vision. More likely though GM will suffer the fate of companies like Bear Stearns, and be sold off in pieces for chump change to some much smarter companies. If that happens, let us hope it is Honda Motors.

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